If you are not actually retiring, the first question is, does that mean you are not going to draw any benefits?
As your wife's salary is currently £40,000 a year, any pension benefit taken will be taxed at 40 per cent. Even the tax-free cash sum could end up being taxed unless you can find enough tax-free investment opportunities to use up all the money.
If she continues to draw on income from the company, the Inland Revenue has also been known to try to impose a tax charge on the lump sum by claiming it was not a “real” retirement.
Pension funds, even after the changes in the 1997 Budget which stopped the fund being able to reclaim the advance corporation tax relief on dividends, are still a very tax-efficient place for investment money.
I would therefore suggest, on the basis that neither you nor your wife are retiring early and do not require any benefits from the scheme as yet, that you do not draw benefit at this stage. However, we should review the scheme to ensure it is set up on the most appropriate basis.
The scheme is an executive pension plan, which is an insured scheme written under occupational pension scheme rules.
Your eventual pension income will be based not just on what the fund can provide but will also be governed by the limits set down under the Inland Revenue's rules. Your existing funds, although relatively large, will certainly not provide you with the maximum pension allowed under these Revenue rules.
If you retire having completed 20 years or more company service, then your pen- sion can be two-thirds of your final remuneration and you will also have the opportunity to commute some of this pension to provide a tax-free lump sum. The tax-free cash sum is also based on your company service and your final remuneration.
As controlling directors, your final remuneration will be an average of at least three consecutive years' earnings, including all taxable benefits, with the averaging period ending within 10 years of retirement.
If you want to maximise your benefit, you need to have high recorded earnings over at least a three-year period and you should ensure your accountant is aware of this requirement and note that, in particular, dividends do not count as earnings for this purpose. If you do increase your remuneration, for example, by way of a bonus payment, you can also consider paying an employee contribution.
Although you are controlling directors, you are also classed as employees and therefore have the same right as other employees to make personal contributions to the pension scheme up to 15 per cent of total pensionable rem-uneration.
These contributions will receive tax relief at your highest rate, that is, 40 per cent, making this a tax-efficient way of using some of the additional income generated via the bonus payment.
Any other investments should also be as tax-efficient as possible and you need to bear in mind your estate would be subject to inheritance tax which you may be able to mitigate with careful planning. I also recommend you consider redocumenting your scheme as a small self-administered scheme.
If you maintain your current level of contributions to the executive pension plan, your existing insurance company will provide all the necessary administration and actuarial work for the self-administered scheme, with no additional fees payable by yourself.
This will allow you to invest any further single contributions with other insurance companies or fund managers either in pension funds or unit/investment trusts.
In this way you can retain your existing scheme but diversify your scheme investment. In principle, if you were both to defer your retirement ages to the maximum 75, you could also use the pension fund to buy one of your existing commercial properties.
Property is, however, notoriously illiquid and, although while it is being rented out it can provide a good investment income which can be used to fund pension income, I think this is a slightly risky strategy and it would be better to stick with collective investments. We need to arrange a meeting with your accountant to discuss these ideas further.